Let’s start with the reason to offer payroll services as I always like to this positively. You can make money! Yeah, I know, modern concept – doing something in business to make money. All jokes aside, payroll can be an extremely profitable service line, if you do it right. There is a raging debate in the industry about how to properly offer this service and if you can make it profitable.
The first school of thought, is to buy a basic payroll calculator, hire an admin, and then manually file everything, make the payments, and send payrolls to your clients. The pricing on this seems to be on par or even slightly less than a large payroll processor. Most firms are somewhere between $100 and $250 per payroll run, depending on employee count. While payroll processors directly used to charge per payroll run, the tides are turning, causing clients to force prices to monthly including as many payrolls as the client wants. You can make margins on this service if you are pricing decently but the risk and the reward seem to be so far off. It is a lot of risk to run someone else’s payroll, let alone be the one responsible for all of the payment deposits.
In this first camp, you have the firms that use the QuickBooks built in not full-service payroll calculator and just file for all their clients. This seems to generate the worst profitability because clients somehow assume it’s super easy and since it’s built into their software, assume it should be cheap. With Intuit phasing out the Intuit Online Payroll and pushing everyone over to QuickBooks Online Payroll, I believe we are seeing many firms reevaluate how and if they are going to offer payroll in the future.
The second big school of thought centers around partnering with a full-service payroll processor. Most large full-service payroll companies will give you a discount if you offer it to your clients. So basically, you charge full service for a payroll processing service, and you keep the 20% margin, or whatever tiered discount you get for having clients on that platform. We use a combination of ADP, Gusto and Rippling, depending on the use case for the client. But we don’t just run payroll for our clients. We provide additional value around consulting on payroll related issues, handling notices (with the payroll company), onboarding and offboarding employees, and other value-added activities. We charge a premium to be the payroll department for our clients. We do not talk about payroll as the payroll companies do – we talk about having a partner in ensuring payroll is always run on-time. We talk about taking that burden away from the business owner and the headache and stress that comes with it.
Using a payroll processor as our backend enables us to be the clients’ payroll advisors. We are able to provide more value to them through taking care of everything else and advising them on any compliance issues in advance. We do make a good margin on the work over time, but some months we don’t make anything at all. Some months we are just there for our clients while they are dealing with insanity. This year, with every state agency basically shutting down, we had a hard time with payroll services. It would have been the year to throw in the towel! Trying to get anything handled was a nightmare and a waiting game. However, we survived the worst of the storm and now it is all upside potential. The best part about this – if you have clients that were dealing with any notices or correspondence issues this year, they are going to beg you to take it off their plate for the future.
Right now, we have an amazing opportunity to leverage awesome tools and provide additional value to our clients. Payroll is not a sexy service line, but it is a good one. And it’s one that clients need and want. Whichever school of thought you are in – the DIY or the backend processor – set your processes up, set your prices where you are comfortable, and only take on clients that respect your value.
